Volume 34 • Number 2
Financial
Planning Strategies
A Financial Planning Update
Understanding Interest Rates
and Your Financial Situation
W
From the Desk of:
Mark P. Sudderberg
Vice-President
hen discussing bank accounts,
investments, loans, and mortgages, interest rates are an important
concept to understand. Interest is the
price you pay for the temporary use of
someone else’s funds; an interest rate is
the percentage of a borrowed amount
that is attributable to interest. Whether
you are a lender, a borrower, or both,
carefully consider how interest rates
may affect your financial decisions.
The Purpose of Interest
Although borrowing money can help
you accomplish a variety of financial
goals, the cost of borrowing is interest.
When you take out a loan, you receive
a lump sum of money up front and are
obligated to pay it back over time, generally with interest. Due to the interest
charges, you end up owing more than
you actually borrowed. The trade-off,
however, is that you receive the funds
(continued on page three)
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E-mail:
[email protected]
(815) 987-2175
Fax: (815) 987-2181
Mark P. Sudderberg
Registered Representative
Securities offered through
First Heartland Capital, Inc.
Member FINRA, SIPC
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Lake Saint Louis, Missouri 63367-1394
(636) 625-0900
Countdown to Retirement:
Strategies for Saving in Your 50s
T
he Baby Boom generation is
about to enter another era:
retirement. Never known for accepting the status quo, Baby Boomers are
ready to redefine the “golden years.”
Forget about endless days of leisure.
This generation seeks adventure, travel,
and new business pursuits. While these
changes may redefine retirement, will
Boomers be able to finance their plans?
Today, many people age 50 and older
have not begun to save for retirement or
have yet to accumulate sufficient funds.
If you’re in this age group and find
yourself facing an underfunded retirement,
it’s not too late to take charge. There are
actions you can take today to get on the
right track. Here are some ideas:
What’s it going to take? First, estimate how much money you will need in
retirement. Once you have an idea of the
amount, you can work toward meeting
(continued on page two)
Countdown to Retirement: Strategies for Saving in Your 50s
(continued from page one)
that goal. You may need
60–80% of your current annual income in retirement.
Your financial professional
can help you assess the best
amount for your situation.
Maximize your contributions. If your employer
offers a retirement plan,
contribute as much as the
law will allow. In 2014, those
age 50 and over can contribute up to $23,000 to an
employer-sponsored 401(k)
plan ($17,500 + $5,500
“catch-up” contribution).
Many employers also offer
a company match, so be
sure you contribute enough
to claim this “free” money,
which can add up over time.
Create a spending plan.
In other words, make a
budget. Many people think
a budget is restrictive, but
look at it this way: You can
spend now, or you can have
the money to afford your
dream adventures later. To
start, it is important that you
pay down debt and avoid
accruing new debt. Next,
examine your spending habits and replace some of your
discretionary spending with
saving. Saving even $20 more
per week is a step in the
right direction.
Take initiative. Besides
contributing to your employer’s plan, you can save
more by opening your own
Roth IRA. Contributions are
made after taxes, but earnings and distributions are
tax free, provided the account is at least five years
old and you have reached
age 59½. Those age 50 and
over can contribute up to
$6,500 a year in 2014.
Eligibility for these plans
begins to phase out with
adjusted gross incomes of
$114,000–$129,000 for
single filers and $181,000–
$191,000 for married joint
filers in 2014.
Hang out your shingle.
Many Boomers hope to start
their own businesses in retirement. Why wait? If you
begin your entrepreneurial
efforts now, your business
has the potential to be in
full swing by the time you
retire, and any profits between now and then can be
added to your savings.
Move it or lose it. Your
home may have significantly
increased in value since you
first bought it, and you may
have already paid off the
mortgage. With children at
or near adulthood, do you
really need all that space?
Selling now and moving to
a smaller, more affordable
location may allow you to
transfer some of the equity
in your home into a savings
vehicle.
Reconsider your retirement age. If you want to
cushion your retirement
savings, consider staying on
the job longer. Some people
actually leave retirement to
re-enter the workforce because they feel more fulfilled
while working. Others seek
part-time work, consulting,
or entrepreneurial endeavors.
Such options may enable
you to earn more money
to save, which may help to
postpone spending down
your savings.
Regardless of which options you choose, you can
benefit from time and compounding interest. Every
year that your savings remain
untouched allows more time
for growth. It is never too
late to start preparing for
your future. So, take action
now to get on track to saving
for your retirement. $
Planning for Your Financial Future
R
2
egardless of the path your life takes, money
will play an important role at
every turn. Certain events,
especially graduating from
college, entering the work
world, getting married, having children, and retiring
all require targeted financial
strategies. Good habits developed now can go a long
way toward helping you
achieve your financial goals.
1) budget your money;
2) keep an emergency fund
to cover three to six months’
From Campus to
of living expenses; and
the Workforce
3) avoid unnecessary debt.
Paying off college loans
If you’re just starting
is
important.
Also, try to
your career, set some goals
avoid
spending
too much
for making the most of your
on
housing
by
limiting
rent
disposable income. Consider
or mortgage-related expenses
the following three rules:
(continued on page four)
Understanding Interest Rates and Your Financial Situation
(continued from page one)
you need to achieve your
goal, such as buying a house,
obtaining a college education,
or starting a business. Given
the extra cost of interest,
which can add up significantly over time, be sure that
any debt you assume is
affordable and worth the
expense over the long term.
To a lender, interest
represents compensation for
the service and risk of lending money. In addition to
giving up the opportunity
to spend the money right
away, a lender assumes certain risks. One obvious risk
is that the borrower will not
pay back the loan in a timely
manner, if ever. Inflation
creates another risk. Typically, prices tend to rise over
time; therefore, goods and
services will likely cost more
by the time a lender is paid
back. In effect, the future
spending power of the
money borrowed is reduced
by inflation because more
dollars are needed to purchase the same amount of
goods and services. Interest
paid on a loan helps to
cushion the effects of inflation for the lender.
Supply and Demand
Interest rates often fluctuate, according to the supply and demand of credit,
which is the money available to be loaned and borrowed. In general, one
person’s financial habits,
such as carrying a loan or
saving money in fixedinterest accounts, will not
affect the amount of credit
available to borrowers
enough to change interest
rates. However, an overall
trend in consumer banking,
investing, and debt can
have an effect on interest
rates. Businesses, governments, and foreign entities
also impact the supply and
demand of credit according to their lending and
borrowing patterns. An
increase in the supply of
credit, often associated
with a decrease in demand
for credit, tends to lower
interest rates. Conversely, a
decrease in supply of credit,
often coupled with an increase in demand for it,
tends to raise interest rates.
The Role of the Fed
As a part of the U.S.
government’s monetary
policy, the Federal Reserve
Board (the Fed) manipulates
interest rates in an effort to
control money and credit
conditions in the economy.
Consequently, lenders
and borrowers can look to
the Fed for an indication
of how interest rates may
change in the future.
In order to influence
the economy, the Fed buys
or sells previously issued
government securities,
which affects the Federal
funds rate. This is the interest rate that institutions
charge each other for very
short-term loans, as well
as the interest rate banks
use for commercial lending. For example, when the
Fed sells securities, money
from banks is used for these
transactions; this lowers the
amount available for lending, which raises interest
rates. By contrast, when the
Fed buys government securities, banks are left with
more money than is needed
for lending; this increase
in supply of credit, in turn,
lowers interest rates.
Lower interest rates
tend to make it easier for
individuals to borrow. Since
less money is spent on interest, more funds may be
available to spend on other
goods and services. Higher
interest rates are often an
incentive for individuals to
save and invest, in order
to take advantage of the
greater amount of interest
to be earned. As a lender
or borrower, it is important
to understand how changing interest rates may affect
your saving or borrowing
habits. This knowledge can
help with your decisionmaking as you pursue your
financial objectives. $
3
Planning for Your Financial Future
(continued from page two)
(principal, interest, insurance,
property taxes, condo fees,
etc.) to between 28% and
30% of your gross monthly
income. When other shortterm debt, such as car payments, student loans, and
credit card bills are included,
the debt limit guideline may
rise to 36% of your gross pay.
For younger workers, retirement is often last on the
list of financial concerns.
However, if your employer
offers a retirement plan with
tax benefits, such as a 401(k),
you may want to make the
most of the opportunity. Pretax payroll deductions make
contributing relatively painless. Try to contribute the
maximum amount allowed—
especially if your employer
matches some, or all, of your
contribution. If you don’t
have a retirement plan at
work, consider opening an
Individual Retirement Account (IRA) that can provide
for tax-deductible contributions
and tax-deferred earnings.
Copyright 2014 Liberty Publishing, Inc., Beverly, MA. The
opin­ions and recommendations
express­ed herein are solely those
of Liberty Publishing, Inc., and
in no way represent advice, opinions, or recommendations of the
Financial Planning Association,
its affiliates or members. CFP™
and Certified Financial
are federally
Planner™
registered service marks of the
Certified Financial Planner
Board of Standards (CFP Board).
This summary does not constitute
legal and/or tax advice and should
only be relied upon when coordinated with a qualified legal and/or
tax advisor. April 2014.
Whether single or married, financial goals take on
greater importance as you
assume adult responsibilities.
You and your spouse may
choose to name each other
as beneficiaries of retirement
accounts, annuities, or life
insurance policies. Also consider the protection offered
by disability income insurance. In the event you or
your spouse is unable to work
due to an accident or illness,
disability income insurance
can provide a certain level
of replacement income.
Although children present
new and immediate
Settling Down
demands on your time and
If settling down means
financial resources, having
marriage, you now have two dependents may motivate
financial situations to recon- you to plan for the future.
cile. Keep in mind that
Two essentials include admarriage establishes a legal
equate life insurance and a
relationship, and your spouse will that names guardians
may have his or her own
for minor children.
debt. Ideally, attempt to
You may also want to esbegin your new life together tablish an education funding
with a clear balance sheet.
plan to help finance higher
education. Many adults
feel torn between saving
for their children’s college
education and their own retirement. Starting early may
allow you to do both.
Nearing Retirement
For many people, a
comfortable retirement may
require 75% to 80% of their
pre-retirement income. The
three-tiered components of
retirement income consist
of Social Security, employersponsored plans (e.g.,
401(k)s, pensions), and
personal savings. If you
anticipate little or no income from Social Security
or a traditional company
pension, you will need to
prepare early to make up
the difference with savings
and an employer-sponsored
retirement plan.
A comprehensive estate
plan, to minimize potential
estate tax liabilities and to
help ensure that your assets
are transferred to your heirs
according to your wishes, is
also important.
It is never too early to
begin building the foundation for your financial
future. Good habits developed now can go a long way
toward helping you achieve
your financial goals. Regardless of your stage in life, be
sure to consult a qualified
financial professional to
help you determine appropriate strategies for your
unique circumstances. $
Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts
and circumstances. The information contained in this newsletter is not intended as tax, legal, or
financial advice, and it may not be relied on for the purpose of avoiding any Federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is
derived from sources believed to be accurate. Neither the information presented nor any opinion
expressed constitutes a solicitation for the purchase or sale of any security. Written and published
by Liberty Publishing, Inc. Copyright © 2014 Liberty Publishing, Inc.